7 reasons to avoid commodities and why they're wrong

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(MoneyWatch) One of the most contentious debates in finance is whether investors should consider including an allocation to commodities in their portfolio. The reason for considering including commodities is that they act as a form of portfolio insurance. Commodities have been shown to hedge the risks of unexpected inflation, tending to perform best during periods of rising inflation, when nominal return bonds do poorly. Commodities also have been shown to hedge supply shocks that hurt stock returns (such as the oil embargo of 1973-74), though not demand shocks to the economy (such as the financial crisis of 2008). And historically, including commodities has led to more efficient portfolios (higher risk-adjusted returns).

Yet, there are many critics who claim a host of reasons to avoid commodities. Today, we'll address the seven most often cited reasons to not include them in your portfolio. In our analysis, we'll show the data for the two major commodities indexes, the S&P GSCI and the DJ-UBS. The major differences between the indexes are time frame (with the S&P GSCI starting in 1970 and the DJ-UBS starting in 1991) and make-up (with the DJ-UBS being less concentrated in energy).

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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